Politics & Policy

The Metastasizing Distortions of Electricity Favoritism

A repairman works on power lines in Staten Island after Hurricane Sandy in 2012. (Keith Bedford/Reuters)
One set of energy subsidies makes another set necessary.

Oh, what a tangled web we weave when first we practice to meddle in energy markets. The latest tangle began when the federal government and a large number of state governments implemented policies subsidizing and guaranteeing substantial market shares for “renewable” electricity, wind and solar power in particular — technologies that are wildly uneconomic, notwithstanding ubiquitous assertions to the contrary.

As described below, these policies are creating serious distortions and reliability problems, in the face of which various states are proposing another round of market meddling so as to ameliorate the problems created by the renewables policies. Consider Illinois, Ohio, and Pennsylvania. In December 2016, Illinois enacted a program to provide “zero-emissions” credits to two nuclear plants threatened with early retirement due to market conditions. Three other nuclear plants in Illinois now face similar problems, exacerbated by the subsidies and favoritism just summarized, and it is likely that legislation to provide them with credits will be introduced. In Pennsylvania, an analogous effort is being made in the state legislature to prevent early retirement for two nuclear plants and to subsidize other nuclear plants that remain profitable for now under the same “zero emissions” framework. In Ohio a proposal is likely to be reintroduced in the legislature to establish a similar subsidy program for nuclear plants threatened with early retirement, and there is serious discussion of a bailout plan for some coal plants.

What’s going on? Why would both renewables and their competitors receive subsidies? Consider the policies for subsidizing and expanding the market shares of renewable power. As a crude generalization, these policies have been justified as solutions to a purported climate crisis engendered by emissions of greenhouse gases (GHG); the renewables supposedly are “clean.” The fact that no such crisis is evident in the data and that there is nothing clean about wind and solar power have not given pause to the proponents of renewables favoritism. Sadly, government interference in energy markets is not immune to the iron law of unintended consequences: Meddling creates distortions and massive meddling yields massive ones. Because not all electricity is created equal, and because policymakers are not renowned for technological sophistication, the drive for more and more renewable power has created reliability problems, demand/supply imbalances, and now the growing efforts to counter the adverse effects of the renewables favoritism with subsidies for conventional power production when it finds itself at an artificial disadvantage.

The federal subsidies for wind and solar power — mainly the production tax credit and the investment tax credit, respectively — have the effect of allowing states implementing guaranteed market shares (RPS: “renewable portfolio standards”) for renewables to shift much of the higher costs of their wind and solar electricity onto federal taxpayers. Obviously, tax favoritism does not reduce the higher costs; it merely hides them. But higher costs are not the only problem. Because the wind does not always blow and the sun does not always shine, and because neither is predictable, wind and solar power are intermittent — that is, they are unreliable. Accordingly, they cannot be scheduled (they are not “dispatchable”), and their output is substantially independent of the ups and downs of demand conditions, whether on a daily or seasonal basis, in particular for wind power..

These problems are emerging in full force at the state level as efforts to satisfy the RPS requirements within the specified deadlines find themselves in conflict with the need to preserve system reliability. Illinois has implemented a 25 percent RPS requirement by 2025–26; Ohio, a 12.5 percent RPS by 2026; and Pennsylvania an 18 percent RPS by 2020–21.

Reliability has been a longstanding benefit of power generated with conventional technologies: coal, natural gas, nuclear fuels, and the energy stored in falling water at hydroelectric facilities. Tax subsidies — the wind production tax credit in particular — allow producers of renewable power to cut their prices sharply when market demand conditions are weak, sometimes to negative levels. It is costly (inefficient) for natural-gas plants to cycle up and down in the face of this subsidized competition, very difficult for coal plants, and technically impossible for nuclear plants.

In short, expensive power is “outcompeting” inexpensive power because of perverse public policies. This is very different from the legitimate competitive pressures facing coal plants due to inexpensive natural gas. Moreover, it is difficult to believe that an existing nuclear plant cannot compete with a new natural-gas plant (and thus that the former requires a subsidy). And higher costs are only the lesser part of the problem; reduced reliability is the real looming crisis, as the potential costs of blackouts are vastly greater.

Hence the various state efforts to bail out nuclear plants — and it is implausible that subventions for coal plants will not follow as the outcome of efforts to forge the relevant political coalition). However real the problems created by the renewables favoritism may be — and they are real indeed — even more market meddling is unlikely to prove salutary.

One truth will prove eternal: Subsidizing those plants as an offset to the perverse effects of the renewables subsidies will prove a policy impossible to exit, and thus will create a power grid permanently distorted by a series of subsidies, market-share mandates, and other costly policies driving up power rates and reducing competitiveness across the economy.

Efficient market outcomes are the result of millions of individualized decisions made and remade each day. Government cannot know the underlying information structure and has few incentives to discover it or incorporate it into policymaking. Accordingly, a very different approach at the state level would be far more advisable: Eliminate the RPS requirements and force renewables, even with the federal subsidies, to compete with conventional power generation for contractual, day-ahead, and hourly sales into bulk power markets. Eliminating the guaranteed market shares would cast aside many of the distortions created by the current system of market interference by government, and unlike the newly proposed additional round of meddling, would avoid a further expansion of problems attendant upon that iron law of unintended consequences.

At the federal level, it would be far better to allow the wind and solar subsidies to phase out, as under current law, and allow the market to return to a long-run efficiency equilibrium in terms of investment and the mix of power technologies. This would also end the current system of allowing individual states to shift part of the costs of their renewables policies onto federal taxpayers. Conservative policymakers would be wise to eliminate policy meddling in the power sector, allowing market forces to work.

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